The world is faced with a problem that has existed since the dawn of man, a problem seldom talked about in the media but one that has the ability to alter the course of a nation, even a continent, over-night. This problem, whilst exacerbated by certain side effects of industrial progression, can be solved, and relatively easily.
Over the past 100 years, countless millions have dragged themselves out of the gutter of poverty and hunger. This has been no mean feat, considering the logistical challenges that many of the world’s inhabitants encounter whilst trying to put food on the table. Though there has been great progress in the advancement of technology within agriculture, the world is once again awakening to the fact that there cannot be continuous growth without some form of resistance. Our resistance is that of a diminishing arable land base.
The reality is that the global population is forecast to increase to over 9 billion people by 2050. This is an extra 2 billion mouths to feed. That is an alarming figure on its own, but couple that with the need to produce more food than has been produced in the previous 10,000 years combined and you have dilemma.
Agricultural land in developed countries is diminishing at an astounding rate due to urbanization – the process of the expansion of metropolitan areas. Agricultural land is often located where people want to live, and as such, is re-purposed for housing and commerce.
There’s plenty of potentially arable land left within developing nations, but I say potentially arable, as the soil does not yet contain the required nutrients to support the propagation of agricultural crops on a scale that we need.
Whilst feeding this ever growing population is a gigantic task, it is by no means an impossible challenge to face, nor a hard problem to solve. In fact, we have been using the solution to the problem for thousands of years. The solution has been one of the main contributing factors to the rapid increase in the world’s population.
The solution to our problem, is fertilizer.
Fertilizer contains the nutrients that plants need to thrive. Depending on the type and quality of the soil, the use of fertilizer can literally double, or even triple in some cases, the yield we derive from crops.
Through the efficient use of these nutrients, agricultural yields can grow, unproductive land can be made productive and humans can continue to rise out of poverty.
Why should you as an investor care about fertilizer? You should care because those who provide solutions to problems are rewarded to the measure of the value their solution delivers. Big problems need big solutions. Big solutions mean big bucks.
Source: Focus Ventures
In September 2013, Focus Ventures signed a binding letter of intent between their local Peruvian subsidiary and Juan Paulo Quay S.A.C. (JPQ) for the exploration and acquisition of the Bayovar 12 phosphate mining concession. Bayovar 12 is located 70 km south of the city of Piura in northern Peru, 15km away from Vale’s giant Bayovar phosphate mine. With almost identical geology to Vale’s project, Focus’ initial drilling at Bayovar 12 indicated a substantial Phosphate deposit that is now in the process of being further defined and expanded.
The most important factor you need to consider when evaluating an investment opportunity is the quality of the management team. Pareto’s law tells us that 20% of the people produce 80% of the results. Backing the right people is paramount to success in natural resource investing. With the CEO Simon Ridgway being a Casey Research Explorers League inductee, were off to a flying start.
Let’s examine the Focus team:
Simon T Ridgway, Chairman and CEO
- Prospector, mining financier and Casey Research Explorers League inductee.
- Gets out in the field and makes grassroots discoveries. Deposits found in Honduras, Guatemala and Nicaragua.
- Founder and Chairman of Fortuna Silver Mines and founder and CEO of Radius Gold, Medgold Resources and Focus Ventures. He also founded Cordoba Minerals.
David Cass, President and Director
- Geologist with over 25 years’ international experience in mineral exploration and mining for precious and base metals.
- Fifteen years with major mining company Anglo American plc in jurisdictions such as Turkey, Iran, Eastern Europe and the America’s, including 4 years as Senior Geologist in Peru.
- Responsible for Anglo’s exploration programs throughout Canada, Central America, Mexico, mainland USA and Alaska.
Ralph Rushton, Vice President of Corporate Development & Director
- Over 25 years’ experience in mining and exploration.
- B.Sc. in geology and worked as a geologist in Southern Africa, the Middle East and Eastern Europe.
- For the last 11 years he has worked in business development and investor relations for a number of junior companies and currently serves as a director on the boards of Medgold Resources and Rackla Metals, as well as Focus Ventures.
Kevin Bales, CFO
- 15 years of financial reporting experience in mining and information technology industries.
- CFO for several public junior exploration companies with operations in Canada, Latin America and Europe.
Mario Szotlender, Director
- Degree in international relations and is fluent in several languages.
- Successfully directed Latin American affairs for numerous private and public companies over the past 20 years.
- Specializes in developing new business opportunities and establishing relations within the investment community.
Tim Osler, Director
- Owns and operates a mining consulting and retail mining equipment business.
- Developed a gold mining placer property in the Yukon Territory which is currently in production.
- Director of a number of junior resource companies.
The management of Focus Ventures is made up of extremely experienced and successful people. Identifying and acquiring a project the size of Bayovar 12, establishing a resource estimate and pushing forward towards the development stage of the project is no mean feat considering that around 1 in 3000 deposits become mines.
The Gold Group
Focus falls under the banner of The Gold Group, founded by Focus’ Chairman, Simon Ridgway. The gold group incorporates Rackla Metals, Radius Gold, Fortuna Silver, Medgold and Focus Ventures. The companies have their own highly experienced management teams and together since 2003, the Gold Group companies have raised over $400 million for exploration and development projects.
Having this kind of network, the ability to attract capital when needed is a godsend for a junior mining company.
The Country – Peru
- Political and macroeconomic stability.
- Attractive legal and tax regime.
- Open and stable mining regulatory environment, dominant sector of the Peruvian economy.
- Financially stable – falling levels of public indebtedness (from 37.8% of GDP in 2005 to 19.7 in 2013) and foreign reserves reaching US$65.6 billion based on information available in December 2013.
- Free trade pacts with the United States, Chile, Mexico, Nicaragua, Canada, Costa Rica, Japan, Panama, Thailand, Singapore, EFTA States (Iceland, Liechtenstein, Norway and Switzerland), the European Union, South Korea, Venezuela and China.
- Strong support for sound trade and macroeconomic policies from the current administration of President Humala.
- No restrictions on repatriation of earnings, international transfers of capital, or currency exchange practices.
- One of the most extensively mineralized countries of the world.
- Under Peru’s current legal and regulatory regime, mining concessions have an indefinite term provided that (i) a minimum annual level of production or investment is met and (ii) an annual concession fee is paid.
- The sale of mineral products is also unrestricted, both domestically and externally.
- Branches and permanent establishments of foreign companies that are located in Peru and non-resident entities are taxed on income from Peruvian sources only.
- Achievement of investment grade status.
Mineral exports account for about 60 percent of Peru’s total shipments abroad. Foreign direct investment is pouring into the country, of which the mining sector is a major recipient. The country is generally a good place for doing business as the government realizes to a certain extent (as evidenced above) that capitalism and free markets cause the accumulation of wealth, whilst socialism and central planning have the opposite effect.
The Project – Bayovar 12
Focus recently announced its purchase of an outright 70% interest in Juan Paulo Quay S.A.C. (“JPQ”), the title holder of the Bayovar 12 concession, for US$4 million through completion of the US$5 million loan facility from Sprott Resource Lending Partnership.
The Bayovar 12 concession is 12,575 hectares in size and is located 70km to the south of Piura and 800km north of the capital, Lima. The project is 40km (30 mins drive) on a sealed road from a port that is owned by Focus’ partner in the project, JPQ.
The Pan-American Highway crosses the property at its eastern end and the power line that supplies Vale’s Bayovar Mine also crosses the property. This provides Focus with all the infrastructure to bring its product to market, significantly reducing the capital expenditure that would be required in the build of the mine, had the roads, power and port not been available.
Source: Focus Ventures
Bayovar 12 is located in close proximity to several other producing Phosphate mines. They include:
Vale’s Bayovar Mine:
15km south-west of the Bayovar 12 concession is Vale’s giant Bayovar mine. This huge open pit operation sports a reserve base of 415.9mt of Phosphate. Vale sold stakes in the project to Mitsui (25%) and Mosaic (35%) and retains 40% ownership.
Hochschild’s Fospac Project:
15km west of Bayovar 12 is Hochschild’s Fospac Project that has resources of around 540mt. Hochschild’s cement manufacturing arm Cementos Pacasmayo currently has the project at the feasibility study level.
As previously mentioned, the Bayovar 12 concession is about half an hour’s drive from the port owned by Focus’ partner, JPQ. The port has been used by JPQ to export Gypsum and Phosphate.
In addition to the JPQ port, there is also a port located in Paita. This is about 130 km from the Bayovar 12 project, but it’s a deep water container port, the 2nd largest in Peru. This opens up a whole new world of export opportunity for a bagged or containerized Organic Phosrock product for markets such as California. The estimated cost of transportation to the Paita container port is around $12 a tonne. Bagged Organic Phosrock commands a steep premium so the transportation costs would be a small component of the sales price.
Management set out to identify a deposit between 100mt and 150mt grading at 12-18% P205, roughly in line with the surrounding projects. The NI43-101 that was published after the completion of a 20 hole drilling program came back with a significantly larger resource estimate:
Source: Focus Ventures
Phase 1 Drilling:
The initial 20 holes were drilled over 650ha of the 12,575ha property in a 800m x 800m grid. The resources are distributed between 13 individual phosphate beds that begin as shallow as 26m below surface (a very appealing discovery). The mineralization is open in all directions. The grades and widths of individual beds are very consistent, unaffected by faulting or structural features, and easily correlated across the deposit. Vale are believed to be mining the same beds at their Bayovar Mine.
Phase 2 Drilling:
The successful completion of the 2nd phase of the drilling program has seen the deposit expanded by several kilometers in all directions. The highlights of the drilling show the remarkable consistency of the phosphate beds over long distances with no apparent faults of structures affecting the beds. The company has been working on upgrading inferred to indicated and indicated to measured where possible. The results of the drilling will be released in an updated NI43-101 and that will be included in the PEA that is currently being conducted.
Logging Phosphate cores (Source: Focus Ventures)
The Preliminary Economic Assessment
The metallurgical test work that was being conducted by Jacobs Engineering is now complete and the PEA should be completed by the third quarter of 2015. The work so far has indicated a streamlined and flexible processing route that can produce a 29% P205 acidulation concentrate, mainly by scrubbing with seawater and particle size classification.
Focus’ consulting engineers are currently working on the design of the mine and it’s being coordinated with the environmental analysis to ensure the optimal site layout.
Whilst the main focus of the PEA has been on the acidulation concentrate, management is also studying an opportunity that exhibits far greater potential. Unknown to many agricultural investors is a growing market for Phosphate that exhibits a substantially higher profit margin than ordinary manufactured Phosphate fertilizer products. That market is for Reactive Phosphate Rock.
Reactive Phosphate Rock – RPR
Phosphate rock is the primary raw material used in the production of water soluble Phosphate fertilizers. RPR is like a fine brown beach sand that can be directly added to crops or pasture as fertilizer. The “Reactive” term refers to the process by which the material reacts with natural acids in the soil and the Phosphorus is then slowly released and taken up by plants. This is in contrast to the ordinary Phosphate rock that has to be acidulated (activated through the use of acid) to make it water soluble. RPR continually adds Phosphate to the soil over a long period, longer than many manufactured fertilizers.
There are two types of Phosphoric rock that stand out as the most reactive in the world. They are the North Carolina rock that is almost totally mined out and consumed in the production of acidulation concentrate and the Sechura rock found in Focus’ Bayovar 12 project.
Direct Application Phosphate Rock
Every species of plant has different nutritional requirements. Annual crops are planted every year and generally require a highly soluble phosphate fertilizer that can be quickly absorbed into the plants. Acidulation concentrate generally fills this market however it is often done so mistakenly as not all soils are suitable for such a soluble fertilizer. Perennial crops on the other hand, require a slightly less soluble form of Phosphate that has a longer release time and is not as easily washed away.
This is where RPR or Direct Application Phosphate Rock (DAPR), as the fertilizer product is known, becomes irreplaceable. DAPR is roughly half the price of most acidulation concentrates. A farmer that uses concentrate on long life crops will have to make repeat applications of the fertilizer as it is quickly absorbed by the plants or is washed away. DAPR requires application far less frequently. It is half the price of most manufactured fertilizers and is suitable for organic farming practices due to the simple processing procedure that eliminates material that has no phosphate content, without using chemicals.
DAPR can also be used on short lifespan crops, depending on the acidity of the soil. In some cases, concentrate fertilizers are too soluble and wash away before they can be absorbed by plants. DAPR is an excellent substitute in situations such as this as it can provide a slow release of Phosphate over 2-3 years.
DAPR is recommended in soils with a pH of 5.5 or less, such as tropical and subtropical soils which are predominantly acidic and are often deficient in Phosphate. It can be pelletized and mixed with other nutrients to create an NPK fertilizer blend.
Focus is seriously investigating the economic viability of the production of DAPR. Management believes, as do I, that the Latin American market presents an excellent investment thesis. Certified organic fertilizer generally commands a premium price in Latin American and North American markets so Focus has commissioned Integer Research to carry out a market study on the use of DAPR in North and South America as part of this work. Management has also been attending fertilizer business conferences in some of the target countries for the potential product.
An example of DAPR production (Source: Focus Ventures)
The Profit Margin
Because the process of refining the DAPR is so simple, the production costs are far less than that of conventional acidulation. The PEA to be released in the next few months will detail the production costs for the Bayovar 12 project, but in the meantime I will present some comparables so you can appreciate the potential profitability of the venture.
B&A Mineração – Sapicaua, Serrote and Serrotinho Deposits:
- 2.2Mt @ 19.14% P205 – 12 year mine life.
- Total sales of 1.653 kilotonnes of Phosphate over life of mine (LOM).
- Sales price US $201 a tonne.
- Average operating costs (C1) US $77 a tonne.
- Capex of $31.4 million.
- Revenues of $333.3 million LOM.
- Total EBITDA $199 million LOM.
- EBITDA Margin 59.7%
Fertoz Limited – Wapiti Deposit:
- 1.54Mt @ 21.6 P205 – Over 20 year mine life.
- Total sales of 1.336 kilotonnes of Phosphate over LOM.
- Sales price CAD $250 a tonne.
- Production costs roughly $145 (including distribution which makes up the majority of the costs).
- Capex CAD $2.7 million.
- Margin of $81 a tonne for first 7 years of mine.
These mines don’t take a long time to build and the profit margins are excellent. Given the close proximity of Focus’ Bayovar 12 project to distribution infrastructure and the target markets are on the same continent, I expect the PEA will deliver a very compelling investment thesis.
The Market – Latin America
Latin America is one of the world’s most agriculturally productive continents contributing 11% of the world’s total food production. The climate in countries such as Brazil and Argentina provide the perfect environmental conditions for the propagation of life. The continent also boasts 21% of the world’s arable land.
Although climatic conditions are extremely favorable to farmers, the annual rate of agricultural productivity within the continent falls behind the rate of OECD countries. This presents Latin America with a serious challenge, considering that the continent will need to increase its agricultural productivity by 80% to feed the 35% increase in population that will occur by 2050.
For optimum yields to be achieved, crops must have access to adequate sunlight, plenty of water and the right balance of nutrients in the soil.
Whilst the soil’s in Latin America are nutrient rich, modern farming practices degrade the soil over time and if the lost nutrients are not replaced, this results in the reduction of yields. These nutrients, both core (phosphorus, potassium and nitrogen) and secondary (calcium, magnesium and sulfur) must be replaced. No ifs, no buts.
Large areas of farmland in Latin America are depleted of Phosphate and the repeated use of highly water soluble fertilizers like DAP and MAP only provides a temporary solution.
With limited domestic production of agri-minerals in the leading agricultural producing countries like Brazil and Argentina, the import of these products has been, and will continue to be a very lucrative experience for the companies that produce them.
Let’s delve deeper into two of the continent’s largest agricultural economies, Brazil and Argentina.
- 7th largest economy in the world, the largest in Latin America.
- Ranked 4th in agro-industry and agriculture.
- Within Latin America, a leading investor in agricultural R&D.
- Agriculture accounts for 8% of GDP.
- 25% of the workforce in agriculture.
- Increased grain and livestock production from 1960 to 2011 by 774% and 251% respectively.
- Exports to 215 markets in 180 countries.
- Total exports of $75 billion.
- Biggest exporter of Coffee, Sugar and Orange Juice.
- World’s 2nd largest importer of Phosphate.
- Cereal production in 2014 reached record levels.
- 8.4% of world’s agricultural outputs.
- Top exporter of Soybean Oil and Soybean Meal.
- 4th largest beef producer.
- 3rd largest producer of biotechnology crops.
- Agriculture is 10% of GDP.
- 5th largest wheat exporter.
- 2nd largest for organic land in production.
- Exports to the US increased 22% in 2013.
DAPR in the Americas
There is compelling sales data coming out of the Americas indicating that despite the reduced processing and lower P205 grades, the DAPR products are selling close to, or at a significant premium to manufactured fertilizers (i.e. Phosphoric acidulation concentrate out of Morocco, 32-33% P205 for $115/t). Recent examples include:
- 20% P2O5 Thermophosphate in Brazil sold by B&A Mineracao = US$185/t
- 22-24% P2O5 Sechura RPR sold by Focus’ neighbor, Fosyeiki = US$170/t
- 18% P2O5 Brazilian RPR sold by Dusolo = US$110/t
- 20-22% P2O5 Canadian RPR sold by Fertoz = US$165/t (ca. C$200/t)
As I previously touched on, the simple refinement procedure used in the production of DAPR involves no chemicals. This makes DAPR perfect for organic agriculture. Most investors are well aware of the increasing consumption of organic produce. The trend is growing and more land is being devoted to organic agriculture as the produce fetches a premium to conventional crops. The World Watch institute estimates that there has been a threefold increase in agricultural land dedicated to organic produce since 1999.
Latin America has 18% of the world’s organic agricultural land. Argentina is the largest with 4.2mha, followed by Brazil with 1.8mha. Most organic products from Latin American countries (90 percent) are sold to the European Union, to North America or to Japan. Important organic crops for the domestic markets for which there is a growing local demand are tropical fruits, grains and cereals, coffee, cocoa, sugar, and meat.
There is currently research being conducted on the market on California. The New Zealand and Australian markets will also be investigated as NZ has a history of importing Sechura rock.
Focus plans to break into the organic farming market by getting its product certified organic and the company already has a list of organizations that can certify the Sechura product once production has begun. One of the main sources of fertilizer that organic farmers use is crushed Phosphate rock.
Focus just closed a private placement worth CAD $4.0m. The company issued 20 million units at $0.20 per unit. Each unit consisted of a common share and a warrant at $0.265 for two years from closing.
The proceeds of the placement will be used to make a US$1.5 million prepayment on the company’s loan from Sprott Resource Lending Partnership, for exploration and development of the project and for G&A.
After accounting for the prepayment of $1.5m to Sprott for their $5m credit facility, the company now has $2.5m in the bank. This leaves it well positioned to continue with the advancement of the project.
The 6 month budget to September is as follows:
Source: Focus Ventures
Focus has over $7m worth of warrants and options below $0.30 and I suspect a lot of them will get exercised, giving the company additional funding to repay their credit facility and further the project.
Source: Focus Ventures
Focus has a nice level of insider ownership with strong backing by Sprott Resource Group. There has also been frequent insider buying by management.
- Insiders: 13,668,742 fully diluted (10.8%) Fully Diluted
- Sprott Resources: 13,887,632 (17.8%)
Source: Canadian Insider
Margin of Safety
Focus is trading close to its 52 week low of $0.16 that it touched in December. This low was most likely due to tax loss season and since then the share price has been hovering around the 20 cent mark. Considering the company now has its stake in the Bayovar 12 project, the resource estimate is huge and the PEA is likely to deliver a very compelling investment thesis, I see limited downside going forward.
Source: Google Finance
No investment is without its risks so its important to explore what could go wrong, however unlikely that may be.
- PEA comes back as uneconomical (unlikely, surrounding mines have similar geography and excellent margins. The DAPR study is likely to reveal a lower CAPEX model than the acidulation study, so this provides Focus with options going forward).
- The company runs out of money and fails to secure financing (unlikely, strong institutional backing with management who have raised over $400m in the past decade).
- No market for the product (unlikely, sales data shows the demand is there).
- Government incompetence (permitting) causes extensive delays (possible, however Mr Ridgway has put a mine into production in Peru already so he knows how things work).
- Global Phosphate prices fall making the project uneconomical (unlikely, Phosphate prices have been stable for nearly 2 years after a significant decline. I believe the price is more likely to rise from this point given the fundamentals driving the agricultural market).
- Domestically located competition gets a monopoly on the market (unlikely, domestic competition is limited and the market is huge).
- Management isn’t up to the task (unlikely, past performance indicates a trend of success).
I believe the biggest risk facing the company is that of investor perception. In a resource bear market, people barely care about shiny stuff like gold and silver, let alone some brown dirt. In times like this, marketing is a must and management has to get the story out, or the company will be a dead stock.
On the flip-side, in a worst case scenario where no retail investors appreciate the thesis, the agri-mineral giants are another story. A deposit this size and of this quality is one that the majors would have some dry powder set aside for.
It’s important to note that the smart institutional investors are focused on the long term fundamentals that support the bullish thesis on investment in agricultural and water related assets:
“I also like the phosphate and potash business – the ag minerals business. Those are other commodities that were very high-priced, attracted a lot of capital and then absolutely collapsed in price. But the truth is, without ag minerals, without the green revolution, you can’t feed 7 billion people on a worldwide basis. The world population is growing a lot and all of those people want to eat, so I certainly like the ag minerals businesses too.” – Rick Rule CEO of Sprott Global
I believe the market will appreciate Focus when the PEA and DAPR Capex study shows how profitable the Bayovar 12 mine will be. Following that, the signing of off-take agreements, financing and construction of the mine will certainly generate interest.
Within the next 6 months we should receive the results of the DAPR Capex estimate and the PEA. Looking forward from 6 to 18 months we can envisage a bulk sample pit, field tests with the DAPR product and the possibility of a strategic partnership with a private equity group. From there, commercial production can be expected around the 18+ month mark.
Focus Ventures provides exposure to the growing trends of organic agriculture, conventional agriculture and the developing markets of Latin America. It provides optionality to the price of Phosphate, a wager on the continued success of a mining legend and the ability to leverage the due diligence already conducted by the leaders in natural resource investment.
- World class deposit (highly likely with the further expansion of the resource base).
- Simple mining process – No drilling or blasting required.
- Simple processing – Washing and sizing to produce a concentrate.
- Mining friendly jurisdiction.
- Premium pricing – Recent DAPR sales in Latin America and Canada range from C$110 to C$185 per tonne.
- Logistically sound – Two ports, 40km and 130km with good road access.
- Target markets with proven appetites – Argentina, Brazil, Peru and Central America.
- Ability to penetrate new and lucrative markets – California and New Zealand.
- Superior product with a high margin.
- Followed by experts.
- Heavy institutional and insider ownership.
- Access to capital.
- Most importantly – A play on successful people.
The margin of safety afforded by the market along with the management teams experience and previous successes lend support to my thesis that the company is going to reward investors.